Hello, thank you for standing by. My name is Laura. I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management will conduct a question and answer session. Conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Makela Taphorn with Artisan Partners.
Thank you. Welcome to the Artisan Partners Asset Management business update and earnings call. I am joined today by Eric Colson, Chairman and CEO, and C.J. Daley, CFO. Before Eric begins, I would like to remind you that our quarter earnings release and the related presentation materials are available on the investor relations section of our website. The comments made on today's call and some of our responses to your questions may deal with forward-looking statements which are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release and are detailed in our filings with the SEC. We undertake no obligation to revise these statements following the date of this conference call. Some of our remarks today will include references to non-GAAP financial measures.
You can find reconciliations of those measures to the most comparable GAAP measures in our earnings release. I will now turn the call over to Eric Colson.
Thank you, Makela. Thank you, everyone, for joining the call. Given the volatility and uncertainty in the markets, it is easy to get caught up in the noise of events and momentum of short-term trends. With every unknown, people behave differently. At Artisan, we have established a business model that provides talented people the autonomy to follow their philosophy and process. The incentive structure that rewards successful outcomes in a transparent and predictable way. People, though, are unique. They have their own unique priorities, time horizons, and emotions. In managing Artisan, we not only need to get the structure and incentives right, we also have to be flexible, patient, and fair. After I finish my discussion on talent management, C.J. will discuss our quarterly financial results. On slide two, we have plotted the MSCI All Country World Index over the last 12 months.
The Brexit vote in June was yet another episode of volatility and uncertainty. Volatile and uncertain markets are relevant to talent for a number of reasons. First, in our business, clients, investors, and our talent are all impacted by market swings. As business managers, it's important that we understand that, but not let it preoccupy us. In managing our business, we must remain focused on what we can control, the environment we create for our talent, and the integrity of our investment strategies. Second, short-term market swings reinforce our belief in and commitment to long-term investing. Our investment professionals are long-term investors with investment strategies designed to outperform over full market cycles. Unlike many of the new low-cost exposure-oriented investment products, our strategies are not designed for short-term market timing. We don't believe that's a sustainable way to build wealth over the long term.
Our commitment to long-term investing requires that we be patient with our investment talent. If you want successful long-term outcomes, you must give people the time to achieve those outcomes. Lastly, the Brexit vote itself is a reminder that financial incentives alone are insufficient to produce desired outcomes or explain human behavior. For a majority of the voters, sovereignty and national identity appear to have outweighed short-term economic self-interest. That should not be surprising. Yes, people want to maximize their wealth, but other values are every bit, if not more, important. We remember that in running our business. Turning to slide three. From Artisan's inception, the firm was designed to be in an ideal environment for talented investors. Our business management team works with each investment team independently. We believe that a separate and distinct management function has many benefits.
It optimizes the amount of time portfolio managers can spend on investing by minimizing the amount of time they spend on business matters not directly related to their investment teams. It maximizes purity of performance based upon independent judgment. There has never been a firm-wide chief investment officer or a shared research pool. It creates scale to add new investment teams in various asset classes and regions. We now have seven investment teams managing 14 strategies. Each team is at a different stage of franchise development, but the concept of evolving individual investors into sustainable investment franchises has firmly taken root. Our management function has also evolved. We have developed a business management and operations function that is deep and experienced. It allows us to continue to thoughtfully and responsibly grow our business with new investment teams and asset classes, and into new regions. Turning to slide four.
Another pillar of our business model is economic alignment. People respond to economic incentives. We want the incentives to align the interest of our investment talent with those of our clients and shareholders. We use two main economic tools, our revenue share and equity. Each investment team participates in a bonus pool consisting of 25% of the team's gross revenues. The 25% revenue share is transparent, fair, and potentially very rewarding. The calculation is straightforward and does not change from quarter to quarter. By using gross revenue, we link our top-line revenue with our largest expense, our top talent's bonuses. Business management, in turn, is responsible for managing expenses. This model focuses our people on getting the big things right and minimizes the friction caused by less important items. The bonus pool is divided differently by each team to reinforce their unique structure, behavior, and culture.
The revenue share also aligns the interests of our investment teams, clients, and shareholders. For our investment teams to maximize the long-term value of the revenue share, they must deliver superior investment performance with integrity. If performance is not compelling, or strategies depart from client expectations, clients will leave. When clients leave, the revenue share declines. Our other economic tool is equity. Over the years, we have granted significant firm equity to our investment talent. As of the end of the quarter, investment professionals owned about 24.5% of the equity interest in Artisan. Since our IPO in March 2013, the shares we have granted to our employees represent approximately 6.3% of the equity interests in the firm. We have made 90% of those post-IPO equity awards to investment talent.
Beginning in 2014, approximately one-half of the shares we have issued to investment talent have been career shares, which do not vest until the person's qualifying retirement from Artisan, which requires at least 10 years of service with the firm and meaningful advance notice of the intent to retire. While the revenue share has always been our primary form for compensating investment talent, equity grants provide an additional tool to reward and incentivize performance, growth, bigger pie thinkers, and franchise development. The awards themselves further align the long-term economic interests of our talent with those of our clients and shareholders. On the left side of slide five, we have listed the traits that define an investment franchise. As an investment team develops these traits, revenues become more robust with multiple strategies and longer in duration with more recognizable decision-makers. The incentives pay off with higher revenue and equity.
Financial incentives, though, are not enough to develop franchises in the first place and then keep franchises in the realizable capacity sweet spot. That's because individuals are unique. Everyone does things in their own way, has their own priorities, time horizons, and emotions. As the behavioral economist Richard Thaler has explained, economically speaking, people don't always behave. They certainly don't always behave in the same way. That's why our business structure and business management are critical to franchise development. Our model gives portfolio managers autonomy with respect to their investment strategies, their team personnel and culture, their physical space, and their time. Artisan's portfolio managers on different teams do not report to one another, and each team can leverage our dedicated business management team and operational infrastructure to develop franchise traits in a way that works best for the team.
Our business management team, in turn, leverages the knowledge gained in helping each of the teams. Lessons learned and steps taken to develop one franchise are used to help with the development of the other teams. We help with franchise development, and we work to move it along. We don't force things, and we're not dogmatic. Pushing too hard or too fast or in the wrong way can blow things up. Avoiding mistakes can be as important as additional victories. In the end, we believe that the combination of our talented investors, our business model, and patience and flexibility will turn individual team into teams and teams into franchises. Then keep franchises in the healthy realizable capacity zone. Slide six shows our investment team's performance over various time periods on an absolute basis. 12 of our 14 strategies have outperformed their broad benchmark since inception gross of fees.
Ten of the 12 outperforming strategies have outperformed by more than 376 basis points gross of fees since inception. I do want to remind you that we ceased to manage assets in our U.S. Small-Cap Value strategy in the second quarter. At month-end, before the strategy ceased managing assets, it had outperformed its benchmark by over 357 basis points gross of fees since inception. Though it had considerably underperformed over more recent periods. On a shorter term basis, our U.S. Value Equity, Emerging Markets, High Income, and Developing World teams have all delivered strong year-to-date performance. The Value Equity strategy has returned nearly 15% in 2016 gross of fees, while its broad-based benchmark has returned under 4%. U.S. Mid-Cap Value, Emerging Markets, High Income, and Developing World strategies have each returned more than 7.63% in 2016 gross of fees.
The recent strong performance of the Emerging Markets strategy has resulted in the strategy outperforming the index gross of fees across the one, three, five, and since inception time periods. The absolute returns of our Non-U.S. and Global strategies have been impacted in recent periods by poor market performance in overseas developed markets, particularly in Europe. While those strategies have performed well over longer time periods, the short-term absolute performance has hurt and has significantly impacted our AUM due to the size of the strategies. In the long run, we believe investment performance will drive organic growth. I think this page shows mature strategies with strong and compelling track records, and newer strategies with outstanding shorter-term track records. Producing these results for our clients is our goal. This is the reason that we structure and manage our business for investment talent to thrive, to deliver results for clients.
If we can continue to deliver these results, we are confident that organic growth will follow. Moving to Slide seven, which shows the distribution of our AUM by investment team, distribution channel, client domicile, and investment vehicle. In the second quarter, we had net client cash outflows of $2.3 billion. During the quarter, we saw a slowdown in gross inflows, which we believe is attributable to a number of factors, including market uncertainty and the demand for high-capacity, low-fee products. In the short term, this is a difficult environment for high value-added active managers. Over the last two years, the percentage of our total AUM sourced through our institutional channel has increased from 62% to 65%. This is primarily because we have experienced greater attrition in our intermediary channel. In general, institutional mandates are longer duration than intermediary assets.
We're pleased that our Global products have proven popular with institutional investors, particularly with institutions overseas, where we have more than doubled our number of total client relationships over the last five years. Growth with non-U.S. institutional clients has helped to spread our brand and reputation with other types of investors overseas. Similar to our investment talent, we align the interest of our distribution talent with our investment franchises and clients. Our institutional sales effort is organized around each investment franchise with a distribution business leader working with each team. Our intermediary retail and non-U.S. distribution professionals work across our products. All of our salespeople are incentivized to service and retain existing clients, as well as source new business. As with our investment talent, the culture and financial alignment of our distribution talent empowers business leaders to think and act like business owners.
That includes an appreciation for the importance of capacity management to protect long-term investment performance for existing clients. It also means identifying long-term business opportunities with clients and investors who value the scarcity of our team's investment capacity. The right clients at the right price anywhere in the world. With our three established global strategies, each distribution team is building a pipeline and growth strategy unique to them. Currently, all three are experiencing strong interest outside the U.S., primarily from institutional clients. We built our distribution model to create the best experience for clients, not to maximize scale and efficiency with separate sales, service, and consultant relations teams. In our model, the same people who sold the business also service the business. When the market environment improves, we'll be able to play more offense with the same people.
I will now turn it over to C.J. to discuss our financial results.
Thanks, Eric. As you know, we report both GAAP and adjusted financial results. I'll start on Slide 8 with a review of our GAAP results. For the quarter ended June 30th, 2016, our assets under management declined 2% to $95 billion, compared to $97 billion for the March 2016 quarter and $109.2 billion for the quarter ended June 30th, 2015. Revenues for the current quarter were $180.8 million, up 4% from the March 2016 quarter, and down 15% from the corresponding June quarter in 2015. On a GAAP basis, operating income for the current year June quarter was $58.9 million, up 7% from the March 2016 quarter, and down 25% from the June 2015 quarter.
Earnings per share on a GAAP basis was $0.38 per share for the June 2016 quarter, $0.35 per share for the March 2016 quarter, and $0.50 per share for the June 2015 quarter. For the six months ended June 30th, 2016, revenues were $355.3 million, down 14% from the six months ended June 30th, 2015. GAAP operating income was $113.7 million, down 22% from the prior year six months. Earnings per share was $0.74 per share, compared to $0.95 per share. Slide nine is our AUM results. For the quarter, AUM declined $2 billion compared to the sequential March 2016 quarter, driven by net client cash outflows of $2.3 billion, offset in part by market appreciation of $231 million.
Almost half of our net client cash outflows during the quarter were from our Mid Cap Value strategy that continues to see outflows due to past underperformance. While we are encouraged by year-to-date performance results in this strategy, we expect attrition will continue. In addition, as Eric mentioned, we ceased managing the Small-Cap Value strategy during the quarter and experienced $500 million of net client cash outflows as a result. Much of the remaining net client cash outflows were primarily the result of a reduced level of gross inflows across much of our business. Inflows in our Non-U.S. Growth strategy were down 25% quarter-over-quarter, as intermediaries continued to decrease their overall allocation to EAFE-related strategies and due to continued market uncertainty, including uncertainty surrounding the composition of the EU.
Quarter-over-quarter gross inflows were also meaningfully lower in our Mid-Cap Growth strategy, primarily in defined contribution plans as plan participant re-enrollments continue to favor passive products. Despite recent headwinds that we have faced in the defined contribution marketplace, our Mid-Cap Growth strategy continues to be a meaningful participant in that space. On a more positive note, several of our strategies continue to see strong interest from clients, investors, and consultants. The Global Opportunities strategy had net client cash inflows of $200 million during the quarter. Although that represents a lower growth rate compared to recent quarters, our pipeline of new business in this strategy is very strong, and we expect meaningful growth through lumpy wins over the remainder of the year. Our newest strategies, High Income and Developing World, continue to see net client cash inflows at a healthy pace despite performance track records less than three years.
We believe these flows reflect the demand for these differentiated strategies, the reputation of the teams, and Artisan's history of delivering outperformance. Moving on to slide 10 and our financial results. Despite lower ending AUM, average AUM in the June quarter increased to $96.6 billion, up 4% when compared to the previous quarter. When compared to the same quarter a year ago, average AUM was down 13%. Revenues were $180.8 million in the June quarter, up 4% from the prior quarter and in line with the percentage increase in average AUM. When compared to the same quarter a year ago, revenues decreased 15%, mostly to the decrease in average AUM. Also impacting revenues was a slight decrease in our overall effective fee rate from 76 basis points to 75 basis points, resulting from a slight shift in the mix of our AUM between pooled vehicles and separate accounts.
Revenues for the six months ended June 30th, 2016, were $355.3 million on average AUM of $94.7 billion, down 14% from revenues and average AUM in the six months ended June 2015. Slide 11 shows expenses on an adjusted basis. Our adjusted measures, including adjusted net income, adjusted operating margin, and adjusted earnings per adjusted share, are measures which we, as management, use to evaluate our profitability and the efficiency of our business operations. The adjusted measures remove the impact of pre-offering related compensation and the net gain or loss on the Tax Receivable Agreement. We also remove the non-operational complexities of our structure by adding back non-controlling interests and assuming all the income of our underlying partnership is allocated to the public company. For the most recent quarter, operating expenses, net of pre-offering related compensation expense, were $114.7 million, up $2.8 million or 3% from the March 2016 quarter.
This increase was primarily the result of higher compensation and benefits expense as a result of higher revenues and higher technology expense. Technology expense for the quarter was up as we continue to invest in technology tools, primarily to support our investment and distribution teams. Compared to the June quarter of 2015, net operating expenses decreased $7.8 million or 6%, primarily as a result of lower compensation and benefits expense on lower revenues. Operating expenses, net of pre-offering related compensation for the six months ended June 2016 were down $21.3 million or 9%, primarily driven by a 9% decrease in comp and benefits expense, also as a result of lower revenues. On slide 12, we've broken out our compensation and benefits expenses, which comprise close to 80% of our total operating expense.
Excluding pre-offering related compensation expense, comp and benefits rose slightly but declined as a percentage of revenues, which is consistent with our variable expense model in which close to 60% of our expenses vary with changes in revenues. As a percentage of revenue, incentive compensation, which is the largest component of comp and benefits, was stable quarter-over-quarter. Of all of our expenses, incentive compensation expense fluctuates most directly with revenues. Benefits and payroll taxes declined to 2.9% of revenues from 4.1% in the March quarter, as we benefited from the roll-off of seasonal expenses from the first quarter. Equity-based compensation expense was up slightly, reflecting a full quarter's amortization of the January 2016 equity grant. Compared to last year's year-to-date period, comp and benefits declined $22.7 million or 11%.
Incentive compensation declined as a result of lower levels of revenues in the current year period, as well as the absence of the costs associated with onboarding the Developing World team in 2015. Partially offsetting those declines was an increased level of equity-based compensation expense and an increase in salary costs as a result of a higher number of full-time employees. Moving on to slide 13. For the current quarter, our adjusted operating margin increased to 36.6% compared to 35.8% last quarter and decreased when compared to 42.1% in the June 2015 quarter. For the current six-month period, our operating margin declined to 36.2% from 40.3%. Margin declines from the 2015 corresponding periods primarily reflect lower levels of revenues. Adjusted net income and adjusted net income per adjusted share for the current quarter were $39.8 million and $0.53 per adjusted share.
For the current six-month period, adjusted net income was $77.4 million, or $1.04 per adjusted share, compared to $101.9 million, or $1.39 per adjusted share for the last year's six-month period. Slide 14 begins the discussion on our dividend and cash management. Last week, we announced that our board of directors declared a quarterly dividend of $0.60 per share, payable August 31st, 2016, to shareholders of record on August 17th. Our board set the current level of our quarterly dividend in January of 2016 at a level that we believed would be sustainable throughout the year, taking into consideration our expected cash generation, the amount of cash retained from the cash generated in 2015, expected cash savings resulting from partner exchanges after payments under the Tax Receivable Agreements, and considering market conditions.
On Slide 15, we have illustrated how we evaluate our financial performance in relation to the quarterly dividend by estimating cash generated for the quarter. We calculate the quarterly cash generation estimate by adding back post-IPO equity-based compensation expense, a non-cash expense, to adjusted net income, and then adding back certain other non-cash expenses and subtracting certain cash uses that are not expenses. As you can see, we generate sufficient cash in the second quarter to cover the $0.60 dividend per share. Our cash generation estimate is used to evaluate the quarterly dividend, not to establish the quarterly dividend. As I mentioned on the last slide, while the board retains the right to change the quarterly dividend at any time, the quarterly dividend rate for an entire year is typically established at the beginning of each year in light of our expectations about the year ahead.
In January of each year, the board also considers whether to pay a special annual dividend with respect to the prior year-end, and if so, the amount of that dividend. In making that determination, the board will consider cumulative cash generated in the year, net of dividends paid or declared, cash retained from prior year cash generation, as well as cumulative TR-related cash tax savings. As we announced in January 2016, when we declared the last special annual dividend, we held back $12 million of cash generated during 2015 from the special annual dividend. Together with the TRA cash retained to date, the firm has approximately $25 million or $0.44 per share available for future dividends.
That cash can either be used to support our $0.60 quarterly dividend should we generate less cash than the $0.60 in a future quarter, or it can be declared as part of our special annual dividend, if any is declared. Those cumulative amounts of retained cash generally represent the amount of net cash on our balance sheet after subtracting the $100 million of net cash we target to maintain as a minimum floor. The $100 million of net cash we target to maintain takes into consideration working capital, such as accounts receivable and liabilities not yet paid, like accrued expenses, dividends declared, and the amounts that we owe under the TRAs.
We believe the $100 million of net cash, along with our $100 million of unused line of credit, currently provides us with sufficient cash to implement our business strategy that may require occasional seeding or investments in key talent. I want to clarify that our dividend policy has not changed since our IPO. We target the payout of the majority, if not all, of our adjusted earnings, plus any cash above a conservative view of our operating needs, which we set at $100 million. That payout will be paid to shareholders in the form of quarterly and special annual dividends over time. Hopefully, this has helped explain our dividend policy in light of our current quarterly earnings and cash retained. Finally, our balance sheet. Our balance sheet remains strong with a healthy cash balance and modest leverage at 0.6 times.
Our borrowings of $200 million are supported by earnings and cash. Looking forward to the next quarter, AUM at the end of June was lower than our average AUM for the quarter. However, markets have rebounded in July. In addition, we previously suggested that we estimated full-year communication and technology expenses to be between $25 million and $30 million. Given the spend year to date, we now estimate that the full-year expense will be at the high end or slightly above the original estimate. In closing, our financial model continues to perform as designed, and our high variable expense component provides margin leverage as revenues increase, as experienced this quarter, and margin protection on the downside. That concludes my prepared remarks. We look forward to your questions, and I will now turn it back to the operator.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Robert Lee of KBW.
Yeah. Hi. Thanks for taking my questions, guys. I wanted to clarify a little bit on the, C.J., on the page where you had the cash flow number. The net cash flow after TRA payments, so that $0.19, you have not distributed that, so that's been accumulating, I guess, at the public holding company?
Yeah, that's correct. We considered distributing the TRA in last January, and given the market conditions, we decided to hold back that and retain it for future dividends. That's correct. After, I think, we get through this period and decide what to do with the retained cash, I think our plan would be to distribute that on an annual basis as we earn it.
Great. That, I guess as you point out, would be there possibly to, depending on how assets and earnings play out, possibly to help support the regular quarterly distribution for at least some period of time, if necessary.
Yeah. That would be correct. As you know, the TRA has accumulated since the IPO, and it's now getting to a point where it's, on an annual basis, not a material amount, but a meaningful amount.
Great. That was my only question. Thank you.
Our next question will come from Alex Blostein of Goldman Sachs.
Hi, guys. Good morning. Just following up on the dividend discussion. Clearly the flow dynamic has been challenged and remains pretty challenging and the equity markets overall has been a helper. If you take the beta away from the discussion, it feels like you guys are not covering the recurring dividend from just the ongoing cash flow generation. I guess, the question is, if you did have to reset the dividend, any baseline you can point us to think about what the recurring dividend dynamic would look like as a percentage of your ongoing cash flow generation?
Alex, that would be tough because one, we really haven't discussed cutting the dividend because on slide 15, you can see that we are, from a cash generation standpoint, covering it, and we have a significant amount of retained cash that would enable us to cushion that for several quarters were we to earn on a cash generation basis less. We really haven't discussed that. When we set our quarterly dividend initially, and we've adjusted it each year, we've set it at a level that allows for volatility. If we were to reset, without giving numbers, because I have no idea what they would be, we'd take into account our current earnings, and we would set it at a level that would give us some level of cushion, and allow for a special dividend at the end of the year.
At this point, we're happy paying out a $0.60 quarterly dividend because our policy is to pay out all of our cash-generated earnings and non-cash expenses. At the end of the day, whether it's a quarterly or a special, is not really relevant to us. Our policy remains the same, whether it's in a quarterly or a special.
Got it. Understood. Then a quick question on the product side. Global Value seems to be doing quite well from a flow perspective since you guys reopened it. Any capacity constraints on how we could think about how much more money you guys could take into that strategy?
Alex. It's Eric. The capacity there we've opened in pooled vehicles, we're going to look at that on an annual basis. I don't think there's an enormous amount of capacity there. We're going to manage that so that we don't disrupt the alpha. That's an ongoing dialogue I have with the investment team. I'd model that as you had at the beginning of the year, which is probably limited capacity in the strategy in pooled vehicles. At this point, we're going to keep that open, and we don't see any impact right now with regards to the flows. No change there in the capacity in the short run.
Understood. Thanks so much.
Our next question will come from Michael Carrier of Bank of America Merrill Lynch.
Thank you, and good morning. This is Adam Beatty in for Mike. In the opening, Eric talked about talent management. I wanted to ask about the human capacity within the teams, not so much fund capacity. Firstly, specifically about the merger of Small-Cap Value and Mid-Cap Value, has that played out in terms of the investment process and team dynamic the way you expected? Then looking across the firm, are there other funds that might be merged, or are there teams with maybe some excess human capacity, given the development of investment professionals, or what have you, that might support the launch of additional products? Thank you.
Hi, Adam. It's Eric. Certainly, just ticking down the list there that you had. Clearly that was our mindset in closing the Small-Cap Value strategy. I believe at the time, the Small-Cap Value strategy had approximately 100 securities, of which 90 securities were unique to that strategy. Approximately 10 or so, or less than that, overlapped with the Mid Cap Value and the Value Equity strategy. Taking out 90-plus securities out of the research coverage and system, and keeping the team as is, clearly picked up human capacity to focus on Mid Cap Value and Value Equity. I think we're having a good surplus of human capital there and stronger punching power, and more focus on those securities. I think that's an enormous benefit for the strategy, long term.
We also believe that it gives both Mid Cap Value and Value Equity more degrees of freedom to move up and down the market cap. We don't have any other thoughts around a fund merger to think about. With regards to other teams' capacity, some of our teams, the Global Equity team, has a fairly large research pool. There's obviously an enormous amount of talent there that can percolate up to broaden decision-making. The Global Opportunities, U.S. Mid-Cap Growth, and Small-Cap Growth strategies, each have a lead portfolio manager. We did announce earlier in the year, Jason White becoming a full portfolio manager, so that does increase the human capital capacity. Then some of our newer teams are just up and running. Those are in the early phases. I'm speaking of the Developing World or the credit team.
I believe that we have a nice, healthy human capital capacity. I think when you look at the capacity of new strategies we have versus even the IPO or even before that, we have more capacity on a go-forward basis with more strategies than we've ever had.
Oh, thanks, Eric. I appreciate your thoughts on that. Then following up on a couple of the newer strategies, the Developing World and the credit. Just wanted to get your comments on the outlook in terms of building a scale. They've kind of grown nicely. Are there breakpoints or inflection points on the horizon where the larger scale might put them in the conversation for certain mandates? Thank you.
Certainly within the evolution of a strategy, which we've talked about how strategies typically evolve. In the early phase, you get early adopters, either through Artisan's brand or through the portfolio manager's name recognition. Typically, that comes in through the more flexible decision-making channels of a registered investment advisor or financial advisors, or family offices that have lower barriers with regards to the decision-making process. In essence, it's a person or two that makes decisions. As you get into the institutional mindset, there's investment policies and procedures. There's quarterly board meetings. There's consultants. That takes a longer process to start getting into the bigger dollar amounts, which we quite frankly like because we think we tick all those boxes, and it's more competitive, and it's a field, and it's a higher bar and a higher standard to get into.
We're starting to see that with consultant ratings and due diligence, and certainly in the credit team, which is a little bit further along than the Developing World. Both of them are starting to get ratings and research coverage by the consultants. Usually around that two-year mark, you start getting research, and some of the rating groups pick you up. Then around years three, four, five, you start getting that institutional business in a more consistent manner. I think both those strategies are right on track.
Got it. That makes sense. Thank you for taking our questions.
The next question comes from Eric Berg of RBC Capital Markets. Mr. Berg, your line is open.
Yep. I'm sorry. I had me on mute. Sorry. Eric, I was seeing that in your press release, you wrote something that I think you essentially repeated today, talking about the scarcity of the investment capacity of the teams. What does that mean, in other words? Are you referring to just the dearth of just really good ideas? When you talk about the scarcity of investment capacity, could you rephrase that? What does that mean to you?
Hi, Eric. It means to me that every active product trying to deliver alpha has some limit of dollars they can take in. We tend to be a little bit more conservative on that and value alpha at a very high rate. When we look across our strategies, and even if we're launching something new that could have $10 billion, $15 billion of capacity, in my mind, that's a very scarce asset to have. If you look at a five-, six-, seven-year time horizon to fill that up, you have to look at the mix of assets. You have to look at the fee rate and the pace at which you go in. As you break that down year by year, my mindset is that we have a scarce asset that we should charge a good fee for, and we should manage that.
Everything we do has a scarcity component to it.
In other words, you're saying that the attractive investment opportunities are limited, whether for you and the teams at Artisan or at any fund manager, and that fee rates should reflect that. Is that, in essence, the operating philosophy?
Yeah, I think you do see that with more concentrated strategies. If you break that down in the number of ideas that are working within each strategy, there is scarce alpha generation. You have to have the talent to identify that, and then you have to have the talent to put the dollars, and the allocation behind those ideas. You want to give people flexibility to move within portfolios. If you break it down to that level, that's the scarcity you're talking about. For that scarcity, you should charge an active fee rate for it. Now, if you let your assets go and you're just providing exposure, which I think happened in the industry 10, 15 years ago, and strategies became bloated and exposure oriented, that gave a great opportunity for smart beta.
Our goal is to protect ourselves from alternatives or strategies that would replicate us in an exposure manner, and to focus on alpha generation.
I understand now. Thank you.
Next, we have a question from Chris Shutler of William Blair.
Hey, guys. Good morning. Regarding the DOL and the fiduciary rule, as you've had more time to study it, speak with your distribution partners about the changes they're making to their business models. What, if any, changes do you expect to make to Artisan's business, particularly around marketing and distribution? Thanks.
Hi, Chris. It's Eric. The DOL impact on our business has been fairly minimal. We've had a lot of discussions with our intermediary, especially in the broker-dealer channel. We tend to stay with the centralized research team at the broker-dealer and are implemented through their research. I think from a fiduciary standard, they're providing good insight on Artisan Partners. I do think at the lower levels of the broker-dealer intermediary model, where not as much research or analysis is done, you're starting to see a move a little bit more to passive or implementation on passive. The second effect you're getting is just around the vehicle choice. You're seeing an adoption to a lower revenue share. I think that's probably been the impact where we've seen some assets move from one share class to another share class.
Okay, got it. Then in the press release, Eric, you made a comment in there about holding the line on fees. I don't know if it's possible, but can you quantify the flows that you've essentially forgone in recent quarters on account of not lowering fees?
That's hard to quantify. If you look at our three global strategies, with regards to Global Value, Global Opportunities, and Global Equity, all three rank very well in the peer group and have outperformed the index. We think that's a best-in-class array of global strategies in the marketplace. The primary interest there has been institutional-oriented clients outside the U.S., you have some very large opportunities there, and you could fill up your strategy quite easily. The fee rate gets extremely low. It gets back to the comment on there's a scarcity effect that we have in each of our strategies, and we have to manage that. Chris, I think it's hard to quantify what that is.
Yep.
We believe that that's an important aspect of our organization is to maintain a solid fee mix. That relates back to the topic of this quarter, which is human capital and talent. It's a vicious circle if you start going down that slope and move into exposure fees for high active strategies.
Okay, understood. Just one last one, kind of a bigger picture question. You noted in your prepared remarks that it's been a tough environment for active managers. Looking at flow trends, it's been true for a while now. What, if anything, across the industry, do you think changes that dynamic?
That's a tough one to predict. Until that momentum factor pulls back, if you look at the top quartile of the momentum factor and break that down in an index versus the bottom quartile, you'd have enormous spreads. That if you just pick the momentum there, you're up 20%, 30%, and if you pick the bottom, you're down 20 or 30. You usually don't see any factor spread that wide over a long period of time. Whether it's size, quality, yield, PE, growth rate. The momentum factor is massive. That's what passive indexes are built on. Until that subsides, I think you're going to have a continued effect here of people wanting exposure through passive indexes.
All right. That's helpful. Thank you.
Next, we have a question from William Katz of Citigroup.
Okay, thanks for taking my questions. I appreciate that. CJ, perhaps for yourself. You gave some updated guidance on tech spend, thank you for that. As you step back and look at the franchise where you are today, where do you think you are in terms of the investment spending cycle to generate new growth?
I think materially, we're there. We've built out our global distribution capacity since, what, 2010, 2011. Our technology spend has increased pretty substantially over the last three years, and the increases you're seeing here aren't that meaningful. The increase was $1 million in tech spend this quarter. I think we're pretty full up on the capacity. We've built out our operations for our newer strategies. I think you'll just see it on the margin, until and unless we bring on more new teams.
Okay. That's helpful. Just sort of stepping back, appreciate the discussion between active and passive. You're hearing it out from a lot of your peers as well today, in fact. You have a bunch of closed funds, though, that I think is probably exacerbating some of the pressure on net redemptions. Any thoughts as markets have sort of pulled back broadly beyond the S&P of reopening anything to help jumpstart some of the growth sales, which continue to be pretty challenged for you and the industry at large?
Hey, Bill. It's Eric. The closed strategies, we're in constant dialogue with the teams. You have the two Mid Cap Growth strategies, both Mid Cap Growth and Mid Cap Value. Both have a fair amount of assets in them, and you're getting a decent amount of attrition, especially in the defined contribution clients that continually move to proprietary target dates. Over the years, that was an asset class that built up through the late 1990s and through the 2000s. Those are strategies we keep an eye on. The Small-Cap Growth strategy is fairly tapped out there. There might be some replacement opportunities if a client leaves. I think the largest one out of the group would be the Non-U.S. Value, which I think we're managing the attrition rate in a little bit more active manner. We don't see a need to fully open the strategy.
I think that would be difficult to control flows to the level we would like, which I think would impact the alpha down the road.
Okay. Just one last one. Thanks. Taking all the questions. You've had good success with the credit team in Developing World, as you highlighted. Where is the pipeline in terms of your mind or the opportunity set in terms of broadening out to other team or individuals? How, if any, impact has the market volatility over the last several weeks impacted those discussions?
Bill, are you referring to new investment teams?
Yes.
Okay. The new investment teams discussion, I think has been healthy. The market volatility in Europe has, along with some of the regulatory uncertainty, especially around banks and financial services in Europe, and how people rethink their asset management, has created some discussions. The opportunity set for us, I would say, is about consistent with past years. We have a few teams that we would think would be interesting, but I think there's nothing different about this year than past years because of the volatility, except for maybe a little bit more activity in Europe. I'm not sure if that's from the volatility or our brand is just getting bigger in Europe, given the clients that we're gaining and the exposure we're getting in Europe.
Okay. I thank you for taking my question, guys.
Again, if you'd like to ask a question, please press * then 1 at this time. Our next question will come from Surinder Thind of Jefferies.
Hi, Eric. Just a question around kind of investment philosophy and strategy. Why is targeting alpha generation over a kind of a complete business cycle versus, let's say, maybe a shorter period, let's say three or five years? It would seem that investors, the timeframe or the amount that investors evaluate their investment seems to be shortening in terms of the investment performance. It seems like when we look at turnover rates, if we were to look at the open-end funds, it just seems like holding periods are getting shorter and shorter at this point.
Yes. Certainly, I think if you look at our turnover rates, you're going to see them going down the other way across strategies, where you look at the last three years, someone like Emerging Markets has had a very low turnover rate. Some of the more mature strategies have had a slightly lower turnover rate. I think we see an opportunity there that you see a disconnect from the price and the fundamentals, and you're playing a time horizon there to deliver alpha. I think gravitating to just short-term trading, because people's time horizons are reducing, and especially when you see it in the retail channel, then you might as well just move to an ETF or you might as well just move to high-frequency trading. That's not how we've built our records over the years.
If we're going to deliver and look at our alpha that we've created in the past, we have to be consistent of what we've done, as opposed to moving to the high-frequency trading or to the ETFs or short-term mindset. That's out of favor right now.
I guess, would you consider five years a short-term time period then?
I think over the last five years, yes. When you look at the factors that have been in place and how dominant they've been. Maybe when there's a single factor or two, when someone makes a single bet and gets rewarded, and it's over a five, six-year period, that's not a full cycle, where there's more things in play. I would argue that this timeframe right now is not a full cycle, when one factor dominates the way it has with momentum.
Fair enough. Just maybe a quick update on just your thoughts around pursuing new strategies at this point. Maybe your willingness to be a little bit more aggressive versus, is it just kind of the incremental cost of maybe bringing on a new team? Is it just some reputational risk if a team doesn't work out? How are you guys thinking about that at this point? Perhaps have you not been maybe aggressive enough in the past, given how many strategies are currently closed?
I'm not too concerned about cost here. I'm very concerned about reputation. I'm very concerned about cost on the current infrastructure. If you're just looking at, are we cautious that we don't want to spend or we're not quite sure from an expense side, if we see great talent, we're going to make it work. If we see great talent that may really tax our infrastructure and cause uncertainty with the rest of the operations, we're going to be very cautious. We were very cautious going into credit. That was a whole new back office that we put in place, and I think we've been very successful of broadening our back office, bringing in a credit team that has not just bonds, but high yield, I mean, with bank loans, and has an array of securities in there that we want to make sure we process correctly.
If we get into a newer strategy that taxes the operations, I'll be conservative. If it's a strategy that may wane on our reputation, I'll be conservative. If it's a great talent that comes up and there's alpha generation, we're going to be aggressive. If the talent shows itself, expect us to be aggressive.
Thank you. That's it for me.
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, Laura. We appreciate everybody's time today, and look forward to next quarter.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.